SENATE BILL REPORT

SB 5600

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

As of February 10, 2011

Title: An act relating to placing restrictions on, and enforcing the restrictions on, making small loans.

Brief Description: Placing restrictions on, and enforcing the restrictions on, making small loans.

Sponsors: Senators Nelson, Hobbs, Harper, Pridemore and Kline.

Brief History:

Committee Activity: Financial Institutions, Housing & Insurance: 2/09/11.

SENATE COMMITTEE ON FINANCIAL INSTITUTIONS, HOUSING & INSURANCE

Staff: Alison Mendiola (786-7483)

Background: Payday lending practices are regulated by the Department of Financial Institutions (DFI) under the Check Cashers and Sellers Act (Act), Chapter 31.45 RCW. The phrase payday loan refers to a type of short-term, unsecured loan that is typically offered to consumers by a business outlet offering check cashing services. In a typical payday loan transaction, the consumer writes the lender a post-dated check and, in return, the lender provides a lesser amount of cash to the consumer after subtracting interest and fees. Following this initial transaction, the lender holds the check for a specified period, during which the consumer has the option of either redeeming the check by paying the face amount to the lender or allowing the lender to cash the check after the loan period has expired. The Act contains provisions for the licensing and regulation of businesses offering services related to check cashing and the selling of money orders, drafts, checks, and other commercial paper.

Licensing. A person or entity must be licensed to engage in the business of check cashing or check selling unless exempt from licensing requirements. A licensee must have a small loan endorsement to their check cashing or check selling license to make small loans in the state. An endorsement is required for each location where a licensee makes small loans. Applicants for a license or an endorsement must provide certain information and meet financial requirements.

Loan Terms. A borrower may not take out more than $700 in small loans at any time from all lenders. A borrower may not borrow more than 30 percent of his or her gross monthly income. The lender may charge up to 15 percent for the first $500. The lender may charge up to 10 percent on the amount over $500 if the borrower has a loan in excess of $500. For example, a lender could charge up to $30 for a $200 loan or up to $95 for a $700 loan. The minimum term of a loan is the borrower's next paycheck unless that is less than seven days in which case the minimum term is the date of the next following pay date. The maximum loan term is 45 days.

A licensee is prohibited from making a small loan to a borrower that is in default on a small loan. This prohibition lasts until the loan is paid in full or for two years after the small loan was made, whichever is earlier. A licensee is prohibited from making a small loan to a borrower that is in an installment plan. This prohibition lasts until the installment plan is paid in full or for two years after the origination of the installment plan, whichever is earlier. A licensee is prohibited from making a small loan to a borrower if making that small loan would result in a borrower receiving more than eight small loans from all licensees in any 12-month period.

Enforcement System. A database system is authorized to enforce the Act. The system allows a licensee to verify if the potential borrower is eligible for a small loan. The system is available in real-time and is secure against unauthorized acquisition or use, tampering, or theft. The system is funded by a fee established by the Director of the DFI (Director) by rule. A lender may not charge an additional sum to recover the fee. Information in the system is exempt from public disclosure.

Prohibited Practices. It is a violation of this chapter for any person to:

Any transaction in violation of a prohibited practice is uncollectible and unenforceable.

Criminal Penalties. Any person who violates or participates in the violation of the Act or a rule or orders of the Director is guilty of a misdemeanor. A misdemeanor is punishable by imprisonment for not more than 90 days; a fine to $1,000; or both.

Agency Enforcement. The Director may impose sanctions against any licensee; applicant; or director, officer, sole proprietor, partner, controlling person, or employee of a licensee.

Sanctions may include:

Consumer Protection Act (CPA). A violation of the Act is a violation of the CPA. Remedies under the CPA do not affect any other remedy available to an injured party. In a suit for a CPA violation, an injured party may sue for the actual damages sustained; the costs of the suit; reasonable attorneys' fees; and additional damages in the amount of up to three times the actual damages sustained by the plaintiff. These discretionary treble damages are capped at $25,000.

The Attorney General may also sue to prevent or restrain violations of the CPA and seek restitution for persons injured by violation of the CPA.

Summary of Bill: Language is restructured so the provision that prevented a licensee from making a loan without an endorsement now states that no person may make a small loan without a license and an endorsement.

Small Loan Lead Generation. Small loan lead generation is defined as collecting personal or financial information about potential borrowers that is sold or distributed to:

Small loan lead generation includes activities that do not result in the making of a small loan. Small loan lead generation does not include the use of a website that does not permit residents of the state to provide their personal or financial information.

A small loan lead generator must have a license and an endorsement. When engaging in small loan lead generation, a person must conspicuously disclose that:

When advertising the availability of small loans, a person must disclose his or her Washington license number in the advertisement.

Prohibited Practices. It is a prohibited practice for a person to:

Exclusion from the Act. A person or entity licensed under the Consumer Loan Act (CLA) is exempt from the Act while acting in compliance with the CLA.

Criminal Penalties. It is a Class B felony for any person to violate or participate in the violation of the prohibited practice of:

A Class B felony is punishable by imprisonment for not more than 12 months in jail; a maximum fine of $20,000; or both.

Appropriation: None.

Fiscal Note: Available.

Committee/Commission/Task Force Created: No.

Effective Date: Ninety days after adjournment of session in which bill is passed.